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Thursday, September 18, 2008

From the desk of Dick Fuld, Lehman Brothers CEO

CEOSubmitted By Mark McQueenDear Mr. Buffett:First off, I would like to thank you for meeting with me and my Lehman Brothersteam earlier this week. The opportunity to outline our plan to you personally wasthe highlight of my professional career. I know that it has been a few years since you had anoffice in Manhattan, and we aren’t asking you to take a chair and a desk, but your steady hand atSalomon Brothers is an example of what all of us on Wall Street are so desperately seeking inthese difficult times.As I clearly outlined during our meeting, I firmly believe that an investment in Lehman Brothersby Berkshire Hathaway is a classic opportunity for your great company to, once again, buy afabulous global franchise at a very fair price. This isn’t at all like the situation that JohnGutfreund put you in, and I recognize that you are wary given your previous experience. WallStreet has changed dramatically since 1991, it is far more of a franchise business that relies oncapital than the “people” business that you were once used to. As you mentioned, the $700million Salomon deal was the single largest commitment of your career at that point; and I takeyour point that such sums are now just the bonus pool for the commodity divisionBut much has changed. Over the past year, our firm’s market capitalization has shrunk by morethan $30 billion (about 75%). All of the shareholder wealth that we’ve created over the past 10years has been completely erased in a matter of months, and yet our firm has never had brighteropportunities nor a stronger safety net. This is the investment opportunity that we see for you andthe rest of the Berkshire family. You have the opportunity to invest in the brokerage industry atprices not seen for a decade.Our firm is poised to return to greatness, and many of Bear”s clients are coming our way.Just the other day, a survey of U.S. institutional investors by Greenwich Associates found that“among the largest players, [Lehman and JP Morgan] scored highest in providing their [fixedincome] clients the best support and understanding during the market turmoil.” This survey,conducted between February and April, also found that while JPMorgan was found to haveslightly more institutional trading relationships, Lehman Brothers had slightly more marketshare.What this survey will confirm for you is that our trading desk has continued to serve our manyinternational clients, even when other brokerage firms were pulling back. This bodes well for thenext Bull Market.I have spoken to both the Treasury Secretary and Chairman Bernanke, and they are prepared toassure you personally that Lehman will continue to have access to the Fed’s discount window formany years to come, if so required. As such, our firm cannot fail in the traditional sense. Thefederal government’s balance sheet is impregnable. This is an investment circumstance thatrarely presents itself in the lifetime of any investor; even one as successful as your own.We are very reluctant to raise capital at this juncture. Our recent $6 billion equity raise wasintended to help us weather even the worst storm. I understand that some intermediaries reachedout to you at that time, and that you rightly advised that your modus operandi was not to invest ina club format. I regret that anyone troubled you with the idea back in May, and recognize that bypassing then, as you said in our meeting, you avoided suffering the 44% drop in our shares sincethat deal was announced on June 10th.Your wisdom is clear. But this time it will be different.As we discussed, approximately $145 billion of long-term debt is outstanding including currentyear maturities of $18.5 billion with $8 billion of commercial paper. We have a plan to deal withthese debt tranches, but recognize that a partnership with you would be a tremendous asset whenwe return to the debt markets. My Treasury team advises that we could save in excess of 200basis points on our medium term paper if Berkshire agreed to be our strategc investor prior tocommencing our current year debt refinancing activities.The investors who joined our shareholder group in June recognize that much of what hashappened over the past 5 weeks was unforseen. But no one likes losses, paper or otherwise. Thatbeing said, they will be elated if you join their ranks, let me assure you of that. That old saying,“dilution is your friend”, rings all the more true when the name “Buffett” is involved in thedilution.My partners and I are prepared to consider a $5 billion convertible preferred investment, payingan 8% annual cash yield, with redemption and retraction rights in, say, 20 years. Our stockrallied yesterday on the back of the positive news out of Wells Fargo. But, with a sensiblediscount to yesterday’s closing price of $16.65, your firm would own approximately 33% of ourCompany, at closing. Naturally, we would very much want you to consider joining our Board ofDirectors at the earliest opportunity. Other names would be welcome as well.As we both know, an announcement that Berkshire had agreed to invest capital in our firm wouldpropel both LEH shares and the broader bank index. If yesterday’s rally is any indication, youcould earn a 25% return in a single day merely on the news of your financial commitment to meand our franchise.I appreciate that you have been displeased with the role that you believe Wall Street has directlyplayed in the credit crisis of the past 12 months. I noted that, during our meeting, you specificallynamed Lehman and Bear Stearns as two of the financial institutions that were at the forefront ofthe growth in the CDO, CLO, ABS, subprime and credit swap markets.As you know, the job of an investment bank is to bring to market the products that the marketwants to buy. Although we pride ourselves in our Top 5 ranking in the M&A tables, the feesgenerated on advisory assignments pale in comparison to the revenue that flows from theunderwriting side of our industry, whether it be equity, structured products or debt. I took yourpoint that Wall Street must play a “quality control” role in the process of selling products to ourclients, and I strongly believe that we did our utmost on that front.We were so convinced that these vehicles were money machines that we bought them for theaccounts of our own captive hedge funds. We put our money where our mouths were.I understand that you are also dubious about the long term capability of the hedge fund industryto produce returns that exceed your sense of market norms. I have two points to make on thatfront.Hedge Funds are a key revenue driver on our trading desks, and excellent Prime Brokerageclients as well. Up to 40% of our daily block trades are done for hedge fund clients. Moreover,our ability to create our own hedge funds has generated substantial fees from institutionalinvestors and pension funds around the world. Although the recent SEC push to curtail some ofthe more attractive trading strategies of hedge funds such as ours may hamper our ability to beatthe index, the fee streams that our funds generate are extremely valuable. Particularly at times,such as now, when the underwriting and advisory revenues are weaker than we would like.However, if you would like a commitment from me to exit the hedge fund business, I willcertainly recommend such action to the Board should you agree to our investment proposal.Although I am the leader at Lehman, I am always open to well-reasoned perspectives.In summary, let me again thank you for agreeing to meet with us. I believe that you’ve beenpresented with a unique investment opportunity, and one that is sure to be successful. Yourhallmark is to invest in top notch management teams, and I humbly submit that we’vedemonstrated that we can navigate difficult waters.With your financial commitment to our firm, the sailing will be smooth, and the entire U.S.financial services industry will benefit from the rising tide that would surely follow acommitment from Berkshire. The positive impact that would have on the economy is clear,which would directly beenfit the rest of the Berkshire Hathaway portfolio of companies. This isthe way that America can exit the recession that you believe we are experiencing right now.Thank you, in advance, for your time and consideration. As Senator McCain said himself, and Ipassed along to you, “the country needs you”, and we are honoured that you are considering thisopportunity.Yours Sincerely,“signed”Richard Fuld,Chairman and CEOLehman Brothers Inc.